This round’s criteria came as a surprise to many as participation was open only to locally-incorporated companies fully owned by Malaysians
By Christopher Lee and Chor JackThe bid closed on Sept 2.
The programme deviated from the past three rounds in that this was the first time that participation was limited only to Malaysians.
The previous three LSS rounds allowed foreign parties to hold up to 49 per cent of the equity interest. In contrast, this round’s criteria came as a surprise to many, as participation was open only to locally-incorporated companies 100 per cent owned by Malaysians and companies listed on the local stock exchange (Bursa Malaysia) with at least 75 per cent of their shares held by Malaysians.
There was speculation that this would result in a reduced number of bids. But bid opening prices released by the Energy Commission of Malaysia (“EC”) indicated otherwise.
There were 137 bids in total (138, including an offer for a plant of 7MWa.c., which was under the P1 Package (10MWa.c. – 29.99MWa.c.)). Forty-five of the bids submitted for plants with the proposed capacity of between 10MWa.c. to 29.999MWa.c.
Ninety-three of them submitted for plants with the proposed capacity of between 30MWa.c. – 50MWa.c.
There was some confusion during the LSS4 clarification period as to whether foreign participation would be allowed. The EC had indicated in some of the clarifications that foreign participation would be permitted as long as it is via “non-convertible preference shares with debt characteristics and no voting rights are allowed” (“First Response”).
However, closer to the bid closing date, the EC then clarified that “any financial or debt instruments including but not limited to preference shares for LSS@MEnTARI project can only be issued to and subscribed by Local Company or Malaysian individual” (“Second Response”).
The confusion was further compounded by the fact that the First Response and Second Response were set out in a single response box, and there was no indication that the latter was intended to cancel out the First Response.
Eyebrows were also raised when the LSS4 results were not released by the end of 2020. Results are traditionally announced at the end of the year. The bidding round is held to allow shortlisted bidders sufficient time to commence work to achieve financial close by the end of September of the following year (being the EC prescribed deadline).
With the results announced on Mar 12, 2021, an approximately three-month delay compared to the usual timeline, it remains to be seen whether the EC will extend the dates/period for shortlisted bidders to achieve financial close and the respective scheduled commercial operation dates.
Results of LSS4, and a Recap of the Results of LSS2 and LSS3
The LSS4 bid opening prices and results show an aggressive decline in bid prices in line with international trends. Below is a recap of the bid prices for LSS2 and LSS3 and a breakdown of the bid prices for LSS4.
LSS2
To recap, during the LSS2 bidding round in 2017, the EC had suggested a reference price of RM0.41/kWh based on its estimate of the prevailing market conditions and typical connection requirements. The offer prices, number of bids submitted, and shortlisted bids (successful bids) were as follows:
LSS3
Following that, the EC then reduced the reference price to RM0.3240/kWh for the LSS3 bidding round (which was for Peninsular Malaysia projects only) in 2019 but removed the separation of capacity packages, i.e. there was only a single category and bids could be for plants from 1MWa.c. up to 100MWa.c.
Bidding was aggressive, and, ultimately, there were only five shortlisted bidders (consortiums of entities) amongst 112 bids, and amongst the five shortlisted bidders, four of them were consortiums with links to foreign players.
Many local players were understood to be disgruntled that only five bids were shortlisted. That would mean fewer jobs available to be parcelled out, mainly because most shortlisted bidders were foreign-linked consortiums.
For reference, we have categorised the bid prices received during LSS3 according to the LSS4 capacity packages as follows.
LSS4
The LSS4 (also for Peninsular Malaysia projects only), which was launched amid the Covid-19 pandemic to stimulate the recovery of the economy, was widely seen as a move to allow bidders (particularly local bidders) who were unsuccessful during LSS3 to repurpose their submission packages.
More particularly, foreign participation restriction was seen as a move to encourage local solar industry players’ involvement and a protectionist action to address complaints raised by local players regarding the LSS3 results mentioned above.
It is to be noted that the EC did not set any reference price for LSS4, and the segregation of capacities was reimplemented.
The LSS4 results issued by the EC on Mar 12, 2021, shortlisted 30 out of the 137 bids received and awarded projects of an aggregate of 823.06MWa.c. (out of the 1,000MWa.c. offered in the RFP).
Analysis of Results of LSS4
LSS4 – A Mix of Winners
Among the shortlisted bidders of LSS4 were some familiar names in the solar industry such as Solarvest Holdings Berhad (via Atlantic Blue Sdn. Bhd.), KPower Berhad (via its consortium with Perbadanan Kemajuan Negeri Pahang) and Tenaga Nasional Berhad (via TNB Renewables Sdn. Bhd.), together with several listed companies who are new entrants to the power industry (mainly solar).
Some of them are listed in the table right.
At first glance, their involvement in LSS projects indicates that these listed companies are on the lookout to diversify their revenue streams. However, large scale solar projects are not known to give high returns, and project IRRs usually hover around the high single-digit range.
A closer look suggests that these companies are primarily involved in what is known as “brown” industries. Their involvement in the solar industry could portend a shift by adopting a more ESG-conscious approach in their businesses or activities.
The fact that most of the shortlisted bidders under the P2 Package (30MWa.c. – 50MWa.c.) have listed companies as parent entities could also reflect that listed entities have a better chance at securing awards due to the strength of their balance sheets.
Quality of Bids/Bidders
A curious feature of this LSS4 is that the EC only shortlisted bids of up to an aggregate capacity of 823.06MWa.c. when it had initially called for bids to develop 1,000MW.a.c. of LSS plants.
The shortfall can be attributed to awards made under the P1 Package that did not aggregate to the 500MWa.c. capacity which was offered under that package, with the shortfall of 176.94MWa.c. being quite a considerable variance.
If applied towards the P2 Package, the amount of shortfall could have seen an additional three to six projects being awarded.
Some industry players have intimated that the fact that awards under the P1 Package have not met the targeted amount gives the impression that bids submitted under that package may have been of a lower standard than those offered under the P2 Package.
There may be some truth in that as the targeted amount of 500MWa.c. under the P2 Package was met with all awards made to projects of 50MWa.c., being the maximum capacity on offer, and for bid prices which are more aggressive compared to bid prices of shortlisted bids under the P1 Package. One reason could be that bids under the P1 Package would also not be as financially attractive as under the P2 Package as projects under the P1 Package are smaller and would not have the economies of scale compared to projects under the P2 Package.
Hence, serious players (those generally considered better placed to submit more compelling bids) would not be as interested in participating under the P1 Package.
Conclusion
The EC appears to have met the aim of parcelling out LSS4 awards on a more “equitable” basis to local players, resulting in more jobs for local contractors.
However, it may have come at a price as the EC’s actions prohibiting foreign participation have been widely viewed as a protectionist move. That does not augur well for the economy in general when the nation sorely requires more foreign direct investment, especially if such investment brings with it opportunities for local players to learn from some of the best practices that could be introduced by foreign participants.
It is hoped that the EC could, in its future programmes, not only discard the protectionist stance. They should structure the plans such that awards are made to achieve maximum benefit for the nation and not only to placate those who, but for the way the LSS4 programme was structured, would not have been able to compete on an even playing field with the rest. — @green
